How Much of My Paycheck Should I Save? (2024)

If you’re wondering how much of your paycheck to save but don’t have any concrete goals in mind, there may be a better strategy.

Think about what you’re saving toward instead. Is it a comfortable retirement, a dream home, your kids’ college degree, an extravagant family vacation—all of the above?

“Understanding what your end goal is, is the first step,” says Mary Lyons, a financial advisor and founder of Benchmark Income Group in Dallas.

  • How much of your paycheck to save for retirement
  • How much of your paycheck to save for other goals
  • Healthcare costs
  • How to start saving

One popular budgeting method, the 50/30/20 budget, recommends setting aside a total of 20% of your paycheck for your savings goals, including the magnum opus: retirement. Experts say that’s a fair rule of thumb.

“I think anyone saving more than 15% is in a good spot,” Lyons says, but it’s always better to be precise where you can. How do you do that, though? Here’s what experts suggest.

How much of your paycheck to save for retirement

Retirement is the most expensive goal many Americans will fund in their lifetime. But everyone’s picture of their golden years is different—and costs vary.

A 2022 Northwestern Mutual study found that U.S. adults estimate they’ll need $1.25 million, on average, to retire comfortably. To get there, you would need to set aside about $520 a month for 40 years, earning a 7% annual rate of return.

Say you’re earning a $50,000 salary today; that means you need to save about 12.5% of your pretax income in an account like a 401(k) or traditional IRA to reach $1.25 million. And with a nest egg that size, you’d be able to keep your income right around $50,000 annually throughout retirement.

Depending on your current expenses and income, saving that much of your salary may sound like a breeze—or out of the question.

There are five main factors to consider when it comes to setting your personal retirement savings target:

1. Time horizon

When you need your investments to start generating income—in other words: How many years do you have to save?

Those who are able to start saving early will get a huge advantage, thanks to compound interest. If you start consistently putting money into an investment account in your 30s, you’ll have double the amount by retirement as someone who didn’t start saving until their 40s.

Feeling behind? Don’t sweat. You can use catch-up contributions to save more than the standard limit each year in tax-advantaged retirement accounts.

2. Life expectancy

How long you need your nest egg to last plays a big role. According to Social Security data, if you’re 25, you can expect to live about 50 more years (if you’re male) and 55 more years (if you’re female). Those are just general averages, though. Factoring in your family’s health history can lead you to a more accurate prediction.

3. Annual income target

How much income you need each year in retirement to maintain your lifestyle. The standard guideline is to aim to replace between 70% and 80% of your preretirement income, but Lyons thinks that’s too low. “I don’t know anybody who actively says, ‘I want to reduce my lifestyle when I retire,’” she says. In many cases, people are adding travel and leisure activities into their budget or in the gifting stage of their life—both of which require cash flow.

4. Account types

Where you save your money is as important as how much you put away, Lyons says. Traditional IRAs and 401(k)s are top options for maximizing returns and minimizing taxes, since you don’t have to pay income taxes on the investment earnings until after you retire. The downside is that the money can’t be accessed without paying a penalty until age 59 and a half. People who want to access their savings before then can use a regular brokerage account, or other tax-advantaged financial products like annuities—which pay a guaranteed stream of income for life—or whole life insurance.

5. Additional income sources

How much you anticipate getting from Social Security and other outside income sources, like an inheritance, should also be factored in. Data shows that Social Security benefits for someone retiring at 65 replace about 30% to 50% of prior earnings—the replacement share is higher for those at the lower end of the income spectrum. You can use this online calculator for an estimate of your future benefits (or this one for a quicker, rough estimate).

Use a retirement calculator

You can plug these variables into any online retirement calculator and see an estimate of how much you should be saving on a monthly or yearly basis to achieve your goal.

Or if you’re ready to really dig into the numbers, consult a financial advisor.They have access to more sophisticated software to help you understand the odds your money will last in all manner of scenarios, such as a recession; can tell you which stocks or mutual funds will be best for your portfolio; and help you minimize taxes as you spend down your nest egg.

Where to save for retirement

You should count yourself lucky if you work for a company that offers a retirement plan to employees. Only about three quarters of private industry workers have access to a retirement plan at work, according to the U.S. Bureau of Labor Statistics.

Employer-sponsored retirement plans like 401(k)s let you save far more each year than outside retirement accounts like IRAs—and the company may even contribute extra funds on your behalf. You can save up to $23,000 in a 401(k), 403(b) or 457 plan in 2024, compared with just $7,000 in IRAs. And you only have to pay income taxes on those savings when you take a distribution in retirement.

Many 401(k)s automatically enroll you to save around 3% of your pretax income, and employers may match those contributions. Experts say savers would be foolish to leave that free money on the table.

“If you want to retire after 59 and a half, those tools are great,” says Lyons. That’s the age when you can start withdrawing funds from a 401(k) or IRA without paying penalties.

If you want to retire earlier than that, she says, you’ll need to look at other tax-beneficial financial products too, such as annuities, that can pay out sooner.

How much of your paycheck to save for other goals

Savings targets for nonretirement goals also depend on your timeline and where you save the money. Here are some important considerations for emergency funds, down payments, health care costs and college savings.

Emergency fund

Before you start saving for any large future expenses, you need a safety net. “Making sure you have your emergency fund taken care of first is absolutely key, and then you can start looking at putting money into investments,” Lyons says.

See Also
Down Payment

An emergency fund is meant to cover at least three to six months of household expenses, according to most financial professionals, though the right amount for you may depend on how efficiently you can pare down your expenses in a sudden financial squeeze. If you live a big lifestyle, support other people or have unreliable income, aim for more savings.

You should keep the cash somewhere easily accessible that carries no risk, such as a high-yield savings account, money-market account, or CD.

Emergency funds can be used to pay bills if you lose your job or “take care of the water heater, the flat tire, the broken windshield” and other costs that crop up, says Brian Heckert, a financial advisor and founder of FSM Wealth, an Illinois-based wealth management firm.

Home purchase

How much you should save for a down payment depends in part on your home buying budget. You’ll generally need to have between 3% and 20% of the purchase price of the home upfront in cash, plus an additional 2% to 6% for closing costs.

A high down payment is ideal, since it will unlock a lower interest rate, give you more starting equity in the home, and help you avoid paying for private mortgage insurance, or PMI.

Once you know your target down payment, it’s easy to figure out how much you need to save from each paycheck. Let’s say the number is $50,000 and you plan to buy a home in three years. You would need to save about $16,667 a year or almost $1,400 a month. If you’re paid bimonthly, that’s $700 per paycheck.

And since you need the money in relatively short order, it’s best to save into a high-yield savings account or a series of CDs where it’s easily accessible and earning a small amount of interest. An investment account would likely be too risky for this type of short-term goal.

Don’t forget: There may be other upfront costs of buying a home, too, such as moving expenses or the costs of making minor repairs or updates upon move-in.

Healthcare costs

With healthcare costs rising, having extra stowed away for medical emergencies may be critical. According to data from the Centers for Medicare & Medicaid Service, total out-of-pocket healthcare spending increased nearly 7% in 2022. The average American spent almost $13,500 on healthcare costs in that year alone.

High-yield savings accounts can help you better prepare for these costs, but if your employer offers it, you might also want to consider opening an HSA or FSA. These are tax-advantaged accounts you can use to stow away cash for healthcare and medical-related expenses (even loosely related ones, such as Bandaids, sunscreen and hand sanitizer.)

The total amount you can save in these accounts depends on which one you open. With an FSA, you can contribute—and in most cases spend—up to $3,200 in 2024. With an HSA, it’s $4,150 for individuals and $8,300 for families. HSAs are only available if you have a high-deductible healthcare plan.

College tuition

Increasingly, U.S. families are using 529 plans to pay for their kids’ college expenses. These plans are similar to retirement accounts—you invest in stocks and bonds while your kid is young, and when they’re ready to go to college, you get tax-free withdrawals to pay for things like tuition, books and housing.

Also like retirement planning, there are several variables that factor into the calculation for how much you need to save, including: when your kid starts college, how long they’ll be in school, how much you’ll need to withdraw from the account each year, and how you’ll invest the savings along the way.

One major difference from something like an IRA is that 529s are sponsored by states, not the federal government. As such, your home state’s plan may offer significant tax breaks when you use it.

Most states offer at least one 529 plan. If you already invest at a big retail firm, start by checking out the 529 plan it manages. You can compare the plan to others, like one from your home state, on databases like Saving for College and the College Savings Plans Network.

Another option is a prepaid tuition plan. These let you prepay future college tuition at today’s rates—not those decades down the road. Not every state offers these, but several (Texas, Michigan and Nevada, to name a few) do.

How to start saving

Starting with an overall 20% saving rate is not only daunting, but also unrealistic for young people saddled with student debt or living in an expensive city. “Not everybody can get to that,” says Heckert.

And in fact, if you’re paying off any debt with an interest rate of 8% or higher, you probably shouldn’t put your disposable income toward big goals like retirement just yet, Lyons says, because the interest charges can negate any stock market returns.

When you’re ready to prioritize retirement savings, Heckert says it’s OK to start with a single digit contribution percentage. A good rule of thumb is to contribute enough to your 401(k) or other workplace retirement account to clinch a full employer match, if your company offers it. For instance, it may match 100% of what you save each year, up to 3% of your salary.

Then, Heckert suggests, bump up your saving rate by 1% every six months. That’s an extra $1,000 a year on a $50,000 salary. The increases are so small that it’s like “tricking” your paycheck, he says. If you get a raise or switch to a higher paying job, you may be motivated to save even more.

“What we focus on is getting the money in first,” Heckert says, because the longer you wait to contribute to a retirement account, the less time your savings has to grow in the stock market. In many ways, starting early is more important than saving a lot.

Additional reporting by Aly J. Yale

Meet the contributor

How Much of My Paycheck Should I Save? (1)

Tanza Loudenback

Tanza Loudenback is a contributor to Buy Side from WSJ.

How Much of My Paycheck Should I Save? (2024)

FAQs

How Much of My Paycheck Should I Save? ›

At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.

What percentage of paycheck should go to savings? ›

Typically, saving 20% of your take-home pay is recommended. But if you have a higher income and find you can get by spending 70% of your income or less per month, you can consider saving more. This can set you up nicely for major life purchases or even an early retirement.

Should I save 80% of my paycheck? ›

One popular budgeting method, the 50/30/20 budget, recommends setting aside a total of 20% of your paycheck for your savings goals, including the magnum opus: retirement. Experts say that's a fair rule of thumb.

What is the 60 20 20 rule? ›

Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings. Once you've been able to pay down your debt, consider revising your budget to put that extra 10% towards savings.

What is the 75 10 15 rule? ›

The 75/15/10 rule suggests devoting 75% of your income to living expenses, 15% to investing, and 10% to savings. This guideline can be a flexible way to prioritize your long-term financial future when deciding how to budget and allocate your income, which you can adapt based on your situation.

Is saving $1000 a month good? ›

Saving $1,000 per month can be a good sign, as it means you're setting aside money for emergencies and long-term goals. However, if you're ignoring high-interest debt to meet your savings goals, you might want to switch gears and focus on paying off debt first.

Is saving $500 a month good? ›

The short answer to what happens if you invest $500 a month is that you'll almost certainly build wealth over time. In fact, if you keep investing that $500 every month for 40 years, you could become a millionaire. More than a millionaire, in fact.

How did I stop living paycheck to paycheck and saved my first $1000? ›

7 Steps to Stop Living Paycheck to Paycheck
  1. Start by Creating a Budget. If you don't already have a budget, now is the perfect time to create one! ...
  2. Cut Expenses and Increase Income. ...
  3. Build an Emergency Fund. ...
  4. Stop Accruing Debt. ...
  5. Open a High-Yield Savings Account. ...
  6. Join a Credit Union. ...
  7. Use Free Financial Wellness Resources.

How much will I have if I save $300 a month? ›

If you invest $300 each month, that comes out to $3,600 over the course of a full year. And after 30 years of investing, that would total $108,000. But with the power of compounding, your portfolio's value could rise far higher than that.

What is the 70 20 10 rule? ›

It indicates an expandable section or menu, or sometimes previous / next navigation options. It's an approach to budgeting that encourages setting aside 70% of your take-home pay for living expenses and discretionary purchases, 20% for savings and investments, and 10% for debt repayment or donations.

What is the best budget rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What is the 70 20 10 budget? ›

The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.

What is the 15x15x15 rule? ›

More About the 15x15x15 Rule for Mutual Fund Investments

It says that if you invest Rs. 15,000 per month via SIP in an equity mutual fund that is capable of generating an average return of 15%, you are most likely to become a crorepati in 15 years (as stated in the example above).

What is the cash Rule of 72? ›

Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.

How to budget 50/30/20? ›

The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.

Is saving 20% of your salary good? ›

At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.

What is the 50 20 30 budget rule? ›

Key Takeaways. The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.

Does the 20% savings rule include a 401k? ›

Your retirement savings are an important part of the 50/30/20 method. In the "savings" section, you can apply some or all of the 20% you save to your 401(k), IRA or other retirement account.

Is saving $600 a month good? ›

But when it comes to what they need to be saving, it depends. So, if we're starting with a 30-year-old, they should be probably saving close to $580, $600, at least, a month. And that's if they're going to earn a high rate of return. So it depends on how aggressive and risky that they're looking to be.

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